By Okechukwu Onwuka
A bank is a place that will lend you money if you can prove that you don’t need it.
BOB HOPE
In recent weeks, our focus has been on the basic elements of the risk assessment and management process, particularly as it affects planning and the decision-making process. We’ve also covered the importance of establishing standards for making risk management decisions.

Today, we’ll consider the potential conflicts between the risk tolerance criteria of the lender and borrower, as it affects the entrepreneur(borrower). It is common knowledge that banks typically assess the credit worthiness of potential borrowers using established credit risk acceptance standards.

The primary purpose of this exercise is to secure the lender’s funds by ensuring that the borrower has a viable credit repayment history together with adequate collateral for a business or project that is measurably viable. In this regard, it is the absolute responsibility of the banks or lender to diligently ensure that the credit facility when granted will be secure. This is really not the responsibility of the borrower.

Except in the cases where the lender, due to sharp practices or some other dubious intent, violates the due process, lenders usually watch out for the bottom line, as it affects them. And the best way to secure this profit is for the borrower to regularly pay the interests plus capital in line with credit facility terms and agreement.

Although collateral is always secured, as standard practice, the lender really does not want to ever have to take possession of the collateral as a debt recovery mechanism. This is because such a step is usually complicated and often leads to permanent damage in customer relations with obvious negative consequences. For this reason, good historical cash flow is one that lenders view very positively.

Instances exist where people have produced manipulated cash flow account history to deceive banks into granting them loans that they never planned to repay or use for good projects. That is however not the focus of this piece. The point I’m trying to bring out is that in reality, a bank or lender doesn’t really care if your business is making profits or generating profits at the level you expect, as far as your cash flow proceeds is good enough to pay back the loan plus interests.

It is not that banks wish businesses evil or desire losses in their client’s businesses, it is simply that the banks cannot afford to perform due diligence in their operations and do the same for their customers. It is the responsibility of the each customer to protect himself in the borrower-lender relationship.

In much the same way, bankers are not swayed by the passion and enthusiasm that business men show when applying for credit, if they do not meet the bank’s minimum requirements. It is strictly business. My advice is that if you must borrow, take the time required to protect your business and not simply assume that if a bank approves your loan application, then you will make profits.

The truth is aptly captured by the quote from Bob Hope above “A bank is a place that will lend you money if you can prove that you don’t need it. Many of us make the mistake of thinking that loans are the gateways to success. I have been through that route severally myself.

My experience with loans has taught me invaluable lessons. My major finding is that, unless you have developed a proven and workable formula or system for profitable enterprise, taking loans is one sure way to increase your misery. If your business or company is generating losses, loans will not work miracles.

The first thing to do is always to take the pains to research, study, learn and experiment to determine the root cause of the problem. After correcting the problem and you begin to see signs of progress and profitability, you may then seek loans to grow the business. That is, if you are the impatient breed.

There are a number of reasons though that may prompt the need to borrow.
Internal theft. This is a common occurrence. Unless the stealing process is discovered and stopped, loans will only produce more for the thieves to enrich themselves.

High indirect Costs. Taking loans when management does not realize that the major cost factors are indirect costs, the default potential is high.

Impatience. Even when businesses are generating regular healthy profits, the desire to generate much higher profits propels desire for loans. Sometimes, these funds are intended for high risk projects or initiatives.
Unhealthy Competition.

It is also common to want to expand one’s business to match the level of a competitor or associate, without considering the deeper context of the requirements.

Poor business awareness. These group of people are constantly looking out for loans and credits. They go through life hoping to meet some ‘money-miss-rod’ people or banks who have the natural tendency to throw good money away.

Popularity and Fame. Some entrepreneurs are already very popular as successful entrepreneurs. They are regular features in talk shows, seminars and other events where they are celebrated, give talks to youths and aspiring entrepreneurs.

Their profile is so high and larger than life, that it is inconceivable that their businesses will fold up. At this point, they continue to take more and more loans to finance the façade. Their companies have a good cash flow history and consequently, the banks love them.

While their year-end books record continuing, increasing losses, the banks encourage them too by providing re-financing options. The good side to this scenario is that such entrepreneurs have many bank CEOs and their managers praying for them not to die. At least, not suddenly.

The CEOs will readily donate their private jets or pay for one at any cost to attend to the health needs of any such customers.

As Bob Hope is quoted earlier, your best bet to qualify for a loan is to prove that you don’t need it. And to prove you don’t need it, you have to have developed a profitable business. Banks only want to share in your profits, not your losses. One way of looking at this is that unless there is an emergency situation, profitable businesses can gradually grow to any level they desire without loans over time.

In other words, you have to have a STRONG hold on profitability, to lower your risk exposure when taking loans. You can have such a hold by owning a patent right for a hot demand product or intellectual property, Oil Block licence in an oil rich zone, measurably history of profitability, or some other secure income.

The banks or lenders will only be too glad to share your profits with you. Otherwise, you stand a high risk of working for the bank or getting embarrassed. The choice is always ours to make. Eliminating impatience will go a long way to managing this risk.